Sales Notes

S A LE S & L E A S E

(recitation questions of Dean Jara)

NOTE: The mark “(?)” means that the transcriptionist of this reviewer is uncertain or was not able to find a specific provision/authority to support her answer.

1. What is a contract of sale? By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefore a price certain in money or its equivalent. (Art. 1458, NCC) 2. What is the concept of first refusal in relation to sale? A right of first refusal is a promise on the part of the owner that if he decides to sell the property in the future, he would first negotiate its sale to the promisee.1 3.

Can this right of 1st refusal exist even if there is no lease contract? No, there can be no right of first refusal without a pre-existing contract of lease since the right of first refusal is only an accessory contract. Also, it can only be exercised by a lessee. On the other hand, an option contract is a principal contract which can stand on its own. In an option contract, a consideration separate from the purchase price is required.2 4. State the case of Ang Yu Asuncion v. CA. FACTS: The petitioners were leasees of a residential and commercial space located at Binondo, Manila since 1935. Supported by a letter, the petitioners were promised that, in case the owner decides to sell the property, priority to purchase the property would be given to them. In 1986, the spaces were offered for sale. The petitioners were willing to pay P5M for the property, and they sent a letter to the owners asking for the terms and conditions of the sale. Without responding to the petioners, the owners sold the property to Unjieng (Bobby Cu & Rose) for the sum of P6M. The petitioners filed a case to exercise their right of first refusal, and the trial court ruled that they should be given the right of first refusal if the price were lower than P11M. Unfortunately, while the case was pending with the trial court, the property was sold to Buen Realty for P15M. The CA affirmed the ruling of the trial court, hence the case at bar.3

Coverage: Articles 1458 to 1688

(V.2.7)

HELD: No. It may not. At most, it would authorize the grantee to sue for recovery of damages under Article 19 of the Civil Code on abuse of right. If only a right of first refusal is constituted over a subject parcel of land, even if that right is supported by a separate consideration, its breach cannot justify correspondingly an issuance of a writ of execution under judgment recognizing the mere existence of such right of first refusal, nor would it sanction an action for specific performance without thereby negating the indispensable consensual element in the perfection of contracts.4 Follow-up Questions on Asuncion v. CA: Was there a prior tenant landlord relationship? Did the court decide that the right of first refusal is different from an option? Why is it different? It can independently exist as a lease contract, and in that situation it will be the same as an option. (Decide) Does it have the essentials of a valid option? What about in the option of stocks? How did the SC justify the existence of first refusal in Ang Yu Asuncion? What is its legal basis? Helpful facts: In giving judicial recognition to the “right of first refusal” pertaining to transactions covering specific property, the Court distinguished it from either a sale or an option contract. While the Court classified the “right of first refusal” to be an “innovative juridical relation,” it pointed out that it cannot be deemed a perfected sale under Article 1458 of the Civil Code, nor an option contract under either Articles 1319 and 1479, because it merely pertains to a property without containing an agreement as to the price or the terms of payment in case of exercise of the right of first refusal.5 The SC (in Asuncion) did not rescind the contract of sale because there was no contract between the petitioner and private respondent that could be considered an option contract. Instead, the SC granted an award for damages to the petitioners.6

ISSUE: Whether or not the petitioner has right of first refusal that may effectively annul the sale made by its lessor to another.

5. The essential requisites of a contract. There are 3:

                                                                                                               

                                                                                                               

1

Cezar Lapuz Villanueva, Law on Sales (Manila: Rex Bookstore), 156. Answer contributed by Erika Gallego; see also: Villanueva,161. 3 Case digest by transcriptionist

4

2

5

Villanueva 158. Ibid. 6 Jara Notes of ejlvillena. 2008

page S a n B e d a C o l l e g e o f L a w – M e n d io l a , M a n il a

“That in all things, God may be glorified.”

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S A LE S & L E A S E

(recitation questions of Dean Jara)

(1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. (Art. 1318, NCC) 6. What is a forced sale, in contrast to a voluntary sale? In a voluntary sale, the owner willingly offers the transfer of his property for a price. In a forced sale, however, the owner does not will the sale of his property. A forced sale may be a case where the property is subject to sale even without the consent of the owner, or a case where there is vitiation of consent. Vitiation of consent, according to Article 1390 (2), makes the contract voidable or annullable, defined: “those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible to ratification.” 7.

In political law, the expropriation (eminent domain) still requires a consideration. Who decides the consideration? The expropriation of property for public use is governed by special laws. (Art. 1488, NCC) 8.

Aside from expropriation, what other ways may an owner’s consent be unnecessary? In foreclosure of mortgage7 (e.g. in cases of nonpayment of installments or debts), and executions to recover damages or serve liability. (?) There may still be other answers. The court awards to the creditor the right to compel the debtor to pay. This is an example of a forced sale. 9.

A car is taken and an auction is made. The car is worth P500K, but the highest bidder only bid P40K. The creditor is part of the auction. Do you think the highest bidder will become the owner of the car? Yes, but the sale will be voidable. (?) Isn’t it that, according to the Civil Code, the gross inadequacy of the price will not affect the validity of the sale. CONTEXT: Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract.

                                                                                                                7

A remedy under Article 1484, (3), NCC.

Coverage: Articles 1458 to 1688

(V.2.7)

Art. 1471. If the price is simulated, the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract. Do we apply these provisions of the CC in forced sale? No, the provisions are not applicable when the price is shocking to the conscience and in the event of resale, better price can be obtained. 10. The rules governing installments of personal property. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (Art. 1484, NCC) 11. Let’s assume that 1484 is not part of the Civil Code, what remedy may apply? Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply or is not ready to comply with what is incumbent upon him. The injured party may choose between fulfillment and the rescission of the obligation with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. Follow-up questions for 1191 and 1484: If 1484 were useless, can we still make use of 1191? Yes, because a contract also involves an obligation to transfer and deliver. 1191 speaks of what remedies? Fulfillment and rescission of the obligation with payment of damages in either case. In terms of remedy is there a difference? Yes, Article 1484 includes foreclosure of the chattel mortgage, and such action will prohibit the seller from making further action against the purchaser to recover any unpaid balance of the price. page

S a n B e d a C o l l e g e o f L a w – M e n d io l a , M a n il a

“That in all things, God may be glorified.”

Transcribed By Valera, C.A.M. (2-J)

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S A LE S & L E A S E

(recitation questions of Dean Jara)

In remedy #1 (of Art.1484), the vendor can recover the whole obligation, including the future and not just the unpaid. How is that possible? A debt worth 300K is made. If there are 5 defulted installments, say 20K each, don’t you think that he may only collect 100K? Why are you saying that we may collect 300K? Yes. The vendor may opt for remedy #1: Exact fulfillment of the obligation, should the vendee fail to pay. -

An acceleration clause. In most agreements, an acceleration clause is made to effect in the following manner: In the event of default in the payment of any of the said installments or said interest when due as herein provided, time being of the essence hereof, the holder of this note may, without notice or demand, declare the entire principal sum then unpaid immediately due and payable. In the absence of an acceleration clause? Arts. 1191, 1198, and 1484. 12. In an obligation with a period when does it become due? Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding Section. 13. When is the period in the benefit of the other? According to Article 1198, “The debtor shall lose every right to make use of the period: (1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; (2) When he does not furnish to the creditor the guarantees or securities which he has promised; (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; (4) When the debtor violates any undertaking in consideration of which the creditor agreed to the period; (5) When the debtor attempts to abscond.”

Coverage: Articles 1458 to 1688

(V.2.7)

In the case given, the debtor violated an undertaking in consideration of which the creditor agreed to the period, namely to pay the installments. 14. If the installments made were for a car. Can he get the car and the money? How is that possible? Yes, by choosing the first remedy under Art. 1484 of the CC. Such election would require the fulfillment of the vendee’s obligation to pay. If, however, the buyer is insolvent; or, if, he does not have enough to settle his obligation and only has the car as property to pay for the debt, the vendor may apply for judicial foreclosure. In that case, he may have both the money and the car. (?) 15. How is public auction possible under remedy #1? JARA: The seller, now, can attach the car. Through a writ of attachment, he may now open the car for auction, be the highest bidder, and get both. 16. How about remedy #2: what does he recover: the money, the car, or both? Cancellation of the sale would mean stoppage of payment. This would mean that the vendee would lose his right to the ownership of the object under consideration. The vendor will then get the car, but not get the money. (?) 17. Remember that the car is in the possession of the buyer. If the contract can be rescinded extrajudicially, do you need to go to court for the car? Will this be possible under remedy #2? Cancellation of the sale under #2 may be done judicially or extrajudicially. However, if the vendor is not in the possession of the car, such car cannot be auctioned. Consequently, the vendor would then need the court to intervene or grant him possession. (?) JARA: There can be no foreclosure if he is not in the possession of the car. In turn, it cannot be auctioned. 18. We go to remedy #3. Can you explain how it is carried out? 19. If the buyer hides the car, what can the vendor do? JARA: The action to get the car is called an ACTION FOR REPLEVIN – recovery of possession of personal property. 20. The debt was 800K, the buyer has payed 500K, may the seller recover the balance of 300K? What does the seller recover? page

S a n B e d a C o l l e g e o f L a w – M e n d io l a , M a n il a

“That in all things, God may be glorified.”

Transcribed By Valera, C.A.M. (2-J)

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S A LE S & L E A S E

(recitation questions of Dean Jara)

Coverage: Articles 1458 to 1688

(V.2.7)

JARA: This is the favorite remedy of sellers. Why do you think so? (You still have to go to court)

No. A lease is a long-term rent agreement. The leasee merely has the rights of a usufructuary.

NOTE: Try to refer and complete the table below for questions #20 and #21.

26. A sale of installment of a fund. The seller is aware of the remedies. Instead of having the buyer as the sole obligor, the seller requires another as a solidary debtor. Given the same example, can he go against the other debtor? Yes. In solidary obligations, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently directed against the other, so long as the debt has not been fully collected. (Art. 1216, NCC) However, he who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. (par. 2, Art. 1217, NCC)

21. Compare remedy #3 to #1. JARA: In #2 he gets the car, not the money. Remedies of a Seller (1484) Proceedings

#1 Exact fulfillment By court; Judicial

Unpaid balance

To be collected

#2 Cancel Judicial (1191) or Extrajudicial (by stipulation) May NOT be collected Seller

#3 Foreclosure the c. mortgage

May not be recovered (void) Yes

Seller (for public auction) Yes (as long as N/A Yes Right to bid unconscionable) Everything can be Summary recovered *Alternative, not cumulative. The exercise of one remedy would bar the exercise of the others.

Can the seller assign his rights to another? Yes, through an assignment of credit. Such would constitute a form of Novation known as Subrogation. Such sobrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in the Civil Code; the latter must be clearly established in order that it may take effect. Also, conventional subrogation of a third person requires the consent of the original parties and of the third person. (Art. 1291, 1300, 1301 NCC)

NOTE: In Art. 1486, the courts may intervene if these damages or the refusal on the part of the seller to return paid installments would be unconscionable.

May the 2nd seller also avail of 1484. Yes. The rights of the seller include the exercise of the remedies in Article 1484.

Possession

22. May the buyer bid in the auction of his car? No, he cannot but the seller can. The buyer already has ownership. 23. In Art. 1485 there is another contract. What is this? Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. JARA: This is what marketers call as “rent-to-own” but in banks they call it a “finance lease.” 24. Why is it also covered by 1484? It is covered because Article 1484 covers installments on a contract of sale of personal property. When the lessee exercises his option to buy, the lease paid for the personal property, in effect, becomes installments on the sale of the property.

27. If it is an assignment of credit to a third person, how will the assignee, X, expect to make money from the transaction? Is the chattel mortgage is transferred to X? The assignee, X, subrogates the rights of the assignor to claim from the debtor. Such claim would include the right over the chattel mortgage. 28. The assignee invests 600K to the original seller, in the hope of getting 800K. But, the buyer defaults after paying 500K. The assignee now loses. Who can the assignee run to? Can he run to the original seller? Generally, the assignee may not run against the original seller. JARA: According to the SC, there can only be recovery from the original seller if the agreement with the assignee is “with recourse.” 29. Why is 1484 usually referred to in our books as directory?

25. Is there a transfer of ownership in a lease? page S a n B e d a C o l l e g e o f L a w – M e n d io l a , M a n il a

“That in all things, God may be glorified.”

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(recitation questions of Dean Jara)

Article 1484 is referred to as directory because it provides for the framework from which the vendor of personal property payable by installments may exercise remedies. The special laws merely elaborate on the provisions of such article. 30. Why did they pass the Recto Law if it just repeats 1484? Recto law specifically refers to movables, private property, for the protection of the buyers. It excludes immovable properties. Article 1484 refers to both movable and immovable private property. 31. Compare the Recto to the Maceda Law. Art. 1484

Art. 1592

Recto Law

Maceda Law

Contracts of sale; remedies on installments

Immovable property

Act No. 4122: Installment Sales Law

Late payment, no demand for rescission

Movables, Private Property, For the protection of the buyers

RA 6552: Realty Installment Buyer Protection Act Real Estate, excluding industrial lots, commercial buildings, & sales to tenants

Yes

No

No

Yes

Yes

Yes

Coverage

Application: Contract to Sell Contract of Sale

Option to Buy Seller’s right to bid Provisions: 1 – Exact Fulfillment 2– Cancellation

Yes, but only for residential purposes N/A

Art. 1485 Yes

Yes

Yes

3– Foreclosure of Chattel Mortgage Benefit

N/A

Grace period of 60 days (min.) 30 days after receipt of notice (cancellation/ rescission) by the buyer

Coverage: Articles 1458 to 1688

(Max.: 90% of payments made)

32. If there is an amount distinct from the price, is there a valid contract option? Yes. In fact, the consideration distinct from the price is what makes the unilateral promise binding upon the promisor, based on Art. 1479, NCC. 33. Supposing that the ownership is already transferred to the buyer. The cash surrender value comprises what payments? The cash surrender value comprises of payments made for the completion of purchase price before the surrender of the actual delivery of the thing. (?) 34. Is 1480 not a duplication of Chapter 3? No. Article 1480 refers to any “injury or benefit” from the thing sold, after the contract has been perfected, from the moment of perfection of the contract to the time of delivery. It applies to the sale of fungible things. Chapter 3, on the other hand, involves the effects of the contract when the thing sold has been “lost” may it be entirely or in part. 35. Is there a conflict between 1480, Chapter 3, and 1504? What is the period contemplated? Who will bear the loss? Does 1504 involve the loss after perfection but before delivery? What are the 3 provisions of 1480? Is 1480 equivalent only to fungibles? 1480 tells us that? Who bears the loss? Coverage

Art. 1480 Fungible goods made independently for a single price

Period Contemplated

From the moment of perfection to the time of the delivery

Bearer of Loss

Obligor, even when due to fortuitous events (1262) The risk shall not be imputed to the vendee until they have been weighed, counted, or measured and delivered, unless the latter has incurred in delay.

Important Provision(s) Buyer may claim 50% of payments made, and, after 5 years of installments, an additional interest of 5% per annum

(V.2.7)

Chapter 3 The effects of the contract when the thing sold has been lost. (1493-1494) After perfection

Vendor/Seller 1493. Things. -withdrawal -demand remaining 1494. Specific goods -avoided -valid existing

Art. 1504 The goods

Until ownership has been transferred (regardless of delivery) Seller Also when: 1) Seller retained ownership to secure performance by the buyer 2) Delayed delivery, risk of the party in fault page

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36. When these articles talk about a debtor-creditor relationship who are they in a sale (the seller & buyer)? How do we apply the provision? 37. If the thing is lost by reason of fortuitous event, the obligation is extinguished? The buyer has the obligation to deliver a payment, isn’t it? Will there be a common extinguishment? Do you agree with him, if there is a loss through a fortuitous event the obligation of the seller is extinguished? What if the buyer losses his money through a fortuitous event, may his obligation be extinguished? Why? 38. Does 1504 provide for a different principle? Who is the owner contemplated? The buyer or the thing, if he bears the loss, then will he be compelled to price? 39. Why is there no conflict, again, between 1480 and 1540? In 1480, if the thing is lost, who pays the contract price? There is a common ground in this article. The obligation to pay is with the buyer? Can we not come up with a solution to get rid of this conflict? 40. Can the parties agree that they will follow a different principle/agreement? Yes. Art. 1504 is a rule applicable only when the party did not make an agreement, viz: Art. 1504. Unless otherwise agreed, the goods remain at the seller’s risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyers risk whethere actual delivery has been made or not, except that… 41. Is there also an “unless” in 1480? No, but because the article cites “from the perfection of the contract to the time of delivery, shall be governed by Articles 1163, 1165 and 1262” it, in effect, recognizes stipulation by the parties. In Article 1262, it states that:

Coverage: Articles 1458 to 1688

(V.2.7)

An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a) 42. In law, we recognize the autonomy of contracts. How can they follow the general rule in 1504 when some cases follow 1480? Why is this conflict possible? What does the parenthesis () signify? CONTEXT: 1484. (1454-A-a) 1504. (n) JARA: “(###a)” is an index to the amended provision of the old (Spanish) Civil Code while “(n)” is a new article inserted, due to American influence, to the New Civil Code. The Uniform Sales Act of the United States was patterned from the British, and gives reference to goods. The provision by the Spanish refers to real property. 43. Why do you think that 1504 is an exception to “res perit domino”? The latin maxim res perit domino means that “the risk of loss is borne by the owner.” Article 1504 provides exemptions for such rule, viz: (1) Where delivery of the goods has been made to the buyer, in pursuance of the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer’s risk from the time of such delivery. (2) Where actual delivery has been delayed through the fault of either the buyer of seller the goods are at the risk of the party in fault. 44. Who are those prohibited from buying property? There are 97 According to Art. 1490, 1. A husband and wife cannot sell property to each other, except: (1) When a separation of property was agreed upon in the marriage settlements; or (2) When there has been a judicial separation of property under Article 191 (1458a). In addition, Art. 1491 mentions that: the following persons cannot acquire by purchase, even at a public or judicial auction either in person or through the mediation of another: 2. The guardian, the property of the person or persons who may be under his guardianship; page

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S A LE S & L E A S E 3. 4. 5.

6.

7.

(recitation questions of Dean Jara)

Agents, the property whose administration or sale may have been intrusted to them, unless the consent of the principal have been given; Executors and administrators, the property of the estate under the administration; Public officers and employees, the property of the State or any subdivision thereof, or of any government owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever take part in the sale; Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers with respect tot the property and rights which may be the object of any litigation in which they may take part by virtue of their profession; Any others specially disqualified by law. (Art. 1491)

45. Husband and Wife. How would it prejudice 3rd persons? Medina8 gave the rationale for the relative incapacity of spouses to sell properties to one another to be as follows: (a) To prevent spouses defrauding his creditors by transferring his properties to the other spouse; (b) To avoid a situation where the dominant spouse would unduly take advantage of the weaker spouse, thereby effectively defrauding the latter; and (c) To avoid an indirect violation of the prohibition against donations between spouses under Article 133 of the Civil Code. [NOTE: Article 133 is superseded by Article 87 of the Family Code] Would it be affected by undue influence? No, undue influence by the dominant spouse would be futile because of the continued existence of the common fund on which both spouses can continue claim. They cannot sell property to one another, otherwise it would circumvent Article 87 (FC) – the article does not exclude spouses governed by complete separation of property in its coverage. Consequently, donations and sales between spouses are void. In what way will the heirs be prejudiced? 46. How about in the case of minors?

Coverage: Articles 1458 to 1688

(V.2.7)

If the buyer is a minor, Art. 1489 applies, to wit: All persons who are authorized in this Code to obligate themselves, may enter into a contract of sale, saving the modifications contained in the following articles. Where necessaries are those sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in Article 290. (1457a) What if the minor is a buyer or a seller? If the seller is a minor, the sale will be voidable. According to Art. 1390, the following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n) 47. Is it possible for both to be minors? Yes. What will be the sale between them: void or voidable? Neither. The sale between them will be unenforceable. You say unenforceable. Meaning what? In unenforceable contracts, there is excessive or lack of authority. In this case, the minors were both incapable of giving consent to a contract. (See Art. 1403-1408) 48. Aside from minority, are there other impediments to a sale? Yes. Included are those without capacity to act. (?) 49. Why is there an “unless” in (2) when all of these (Art. 1491) involve a fiduciary position? 50. In your study of Civil law, how do you consider the estate? An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person. Depending on the context, the term is also used in reference to an estate in land or of a particular kind of property (such as real estate or personal

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Medina v. Collector of Internal Revenue, 1 SCRA 302 (1961); as cited in Villanueva, page 49.

page S a n B e d a C o l l e g e o f L a w – M e n d io l a , M a n il a

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estate). The term is also used to refer to the sum of a person's assets only.9 After ones death, the estate is a juridical person created by law, composed of a decedent’s property. Why can it not give its consent? Because it is a juridical person, and not a natural person, it is incapable of decision-making. The executor must have a consent? Yes. The executor is merely a caretaker of the estate. According to Art. 2032, The court's approval is necessary in compromises entered into by guardians, parents, absentee's representatives, and administrators or executors of decedent's estates. (1810a) 51. Give the concept of a document of title. According to Art. 1636, (1), the "Document of title to goods" includes any bill of lading, dock warrant, "quedan," or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by endorsement or by delivery, goods represented by such document. 52. If a document of title, at the outset, was negotiable, may it become a non-negotiable document and vise-versa? Unless the document of title has been extinguished by service, a negotiable document may not be made non-negotiable merely by insertion of words. According to Art. 1510, “If a document of title which contains an undertaking by a carrier, warehouseman or other bailee to deliver the goods to bearer, to a specified person or order of a specified person or which contains words of like import, has placed upon it the words "not negotiable," "non-negotiable" or the like, such document may nevertheless be negotiated by the holder and is a negotiable document of title within the meaning of this Title. But nothing in this Title contained shall be construed as limiting or defining the effect upon the obligations of the carrier, warehouseman, or other bailee issuing a document of title or placing thereon the words "not negotiable," "non-negotiable," or the like.”

Coverage: Articles 1458 to 1688

53. Do you think there is a difference between a “negotiable instrument” and a “negotiable document of title”? Yes. Negotiable Instruments deals with an unconditional promise or order to pay a sum certain in money. (Sec. 1, NIL) While a Negotiable Document of Title refers to documents in the ordinary course of business used in the sale and transfer of goods. (Art. 1636, NCC) 54. So, at most, the Document of Title (DoT) serves as proof of possession but not ownership? Why do you think so? The DoT serves serves as proof of possession, isn’t it? It is a proof of constructive possession or of title to the goods.10 Art. 1513. A person to whom a negotiable document of title has been duly negotiated acquires thereby: (1) Such title to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser in good faith for value; and (2) The direct obligation of the bailee issuing the document to hold possession of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him. (n) Why are you telling us that a vendor has the burden to transfer ownership? Yes. The transfer of ownership is one of the main obligations in a contract of sale. Under Art. 1458, “By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional.” The delivery, don’t you think, is a means to transfer ownership? Yes. (See Art. 1477)

On the other hand, a non-negotiable instrument may not be made negotiable, since a document of title which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee. A non-negotiable document cannot be negotiated and the endorsement of such a document gives the transferee no additional right. (Art. 1511, NCC)

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http://en.wikipedia.org/wiki/Estate_(law); see also Art. 1429, CC.

(V.2.7)

55. If a vendee has as evidence a warehouse receipt, his ownership may still be questioned. He, at most, only has constructive possession of the goods. If what he is holding is a warehouse receipt, why is it limited only to possession and not ownership of the goods?

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Villanueva, 231-232.

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The bailee is holding the goods for the holder of the receipt. He is only in possession of such but the ownership, by constructive delivery, remains with the holder of the document of title. (?) 56. If the buyer does not go to the bailee, can he also use the document of title to sell the goods? Yes. The provisions on documents of title are geared towards assuring the public to take, accept, and deal with transactions over goods and merchandise by means of documents of title issued in representation thereof.11 57. May the possession and ownership of goods be defeated in the evidence of another title? Yes (See Art. 1505 and 1506) 58. How do you call a contract between a bailor and a bailee? JARA: It’s called “bailment.” It is usually the term used for a “contract of deposit.” In Civil Law, the depositor is the possessor – he may even be a thief. 59. You’re familiar with the concept of “holder in due course” under the Negotiable Instruments Law (NIL). Is it possible for the “holder in due course” to acquire rights which the indorser did not have at all? Yes. Based on Sec. 57 of the NIL, A holder in due course holds the instrument free from any defect of title prior to parties, and free from defenses available to prior parities among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. JARA: There is no such thing as holder in due course for the document of title. 60. Under the code, what does the endorsee of a document of title acquire? Based on Art. 1513, A person to whom a negotiable document of title has been duly negotiated acquires thereby: (1) Such title to the goods as the person negotiating the document to him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser in good faith for value; and

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Coverage: Articles 1458 to 1688

(V.2.7)

(2) The direct obligation of the bailee issuing the document to hold possession of the goods for him according to the terms of the document as fully as if such bailee had contracted directly with him. 61. Juan dela Cruz hijacked a plane for Del Monte products. He deposits the products to a warehouseman. The latter issues a DoT to Juan dela Cruz. Juan dela Cruz sells the goods to Pedro Reyes by indorsing the DoT. May Pedro Reyes acquire title to the goods? Yes. The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistake, duress or conversion. (Art. 1518, NCC) Can Del Monte claim the goods from the warehouseman? No. Del Monte cannot claim nor compel the warehouseman to surrender the goods to him. If goods are delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner and a negotiable document of title is issued for them they cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution unless the document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court. (Art. 1519, NCC) 62. If the DoT is not a negotiable document of title, may it be negotiated; or, may it still be subject to sale? Yes. It may by assignment. (?) 63. In the case of NDT, what are the warranties? According to Art. 1516 of the NCC, A person who for value negotiates or transfers a document of title by endorsement or delivery, including one who assigns for value a claim secured by a document of title unless a contrary intention appears, warrants: (1) That the document is genuine; (2) That he has a legal right to negotiate or transfer it; (3) That he has knowledge of no fact which would impair the validity or worth of the document; and

Villanueva, 303.

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(4) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby. 64. Without involving a DoT, if the seller of a property is not the owner of the property, is the contract valid? No. The contract is void. (?)

Coverage: Articles 1458 to 1688

No. One cannot give what one does not have. The snatcher is not the owner, and it does not fall under the exemptions. 68. What if the snatcher sells it in the Bustillos Market? Isn’t that an excemption in the code? No, it is not an exemption. The stolen object may only be validly sold if a buyer purchases it for value from the market. The case, however, contemplates that the sale was made to the market. What if he buys it from a store? The sale will then be valid.

That sale could also be valid, if… what? If a document of title was issued and the purchaser bought the property in good faith for value, without knowledge of any impediments, the sale may be valid. (?) 65. What is the latin maxim that expresses that general rule [on sale of property]? Nemo day quod non habet – one cannot give what one does not have 66. State the general rule and exemptions. IF THE SELLER IS A NON-OWNER: the buyer acquires no title even if in good faith and for value under the maxim nemo dat quod non habet; the exceptions12 are: 1. Owner is estopped or precluded by his conduct. (1505) 2. When sale is made by the registered owner or apparent owner in accordance with recording or registration laws (Art. 1505, (1)) 3. Contract of Sales sanctioned by judicial or statutory authority (Art. 1505, (2)) 4. Purchases in merchant’s store, fairs or markets (Art. 1505, (3)) 5. When a person who is not the owner sells and delivers a thing, subsequently acquires title thereto (Art. 1434) 6. When the seller has a voidable title which has not been avoided at the time of sale (Art. 1506) 7. Sale by co-owner of the whole property or a definite portion thereof (see Villanueva, 328-331) 8. Special rights of an unpaid seller (Art. 1526–1533) 9. In case of movables, under Art. 559, acquisition of possession in good faith under a claim of ownership, where the realowner has not lost or been deprived of the movable, makes the possessor the rightful owner of the movable. 67. A snatcher snatched a cellphone from San Beda and sold it to CEU. Is the sale valid?

                                                                                                               

69. What is the concept of “apparent owner”? Is it not applicable to movable property? 70. In the sale of the co-owner, can he sell the whole property? Let’s say, 1 out of the 4 co-owners sell the property. No. The rule is when prior to partition a co-owner sells the entire property owned in common, the sale of the property itself is void (i.e., the attempt to transfer ownership of the entire property by virtue of the sale), but valid as to his spiritual share.13 EXCEPTIONS14: 1. When the subject matter is indivisible (the spiritual share will be void) 2. When it is made with the consent of co-owners (there will no longer be a spiritual share when the boundaries have been defined) 3. Where the co-owner does not turn over the proceeds of the sale to his co-owners (the spiritual share will be void) 4. Heirs’ subsequent acquisition (may validate any sale made by them, prior to their father’s death) 5. Registration under the Torrens System (in good faith, valid) 71. Is it an obligation to transfer the ownership to the buyer after the thing has been fully paid? Yes. It is an obligation under Art. 1458. 72. Can delivery be done away with by stipulation? No. Delivery is an obligation to be fulfilled by one party; delivery may either be constructive or actual. Actual delivery may be done away with by stipulation, but constructive deliver wherein the ownership passes on to the buyer may not be made under a contract of sale. Parties, however,

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12

From ejlvillena. 2008 Lecture and Recitation Notes on Sales and Lease (Dean Virgilio B. Jara)

(V.2.7)

14

Lopez v. Cuaycong, 74 Phil. 601 (1944); Panganiban v. Oamil, 542 SCRA 166 (2008) Villanueva, 331-332.

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Coverage: Articles 1458 to 1688

(V.2.7)

may stipulate a time for such delivery (See Article 1477 and 1478, CC). (?) 77. May the seller make use of both 1484 and 1526?

73. Although the buyer has already received the thing is it valid, as a stipulation, for him not to be the owner? Yes, it is valid. Based on Art. 1504, the ownership may be retained by the seller to secure the performance of the buyer of his obligation under the contract. 74. What are the kinds of delivery? 1) Actual delivery 2) Constructive Delivery a. Execution of Public Instrument b. Symbolic Delivery c. Constitutum Possessorium d. Traditio Brevi Manu e. Traditio Longa Manu f. Delivery of Incorporeal Property g. Delivery by Negotiable Document of Title h. Delivery Through Carrier 75. What is an unpaid seller? Art. 1525. The seller of goods is deemed to be an unpaid seller within the meaning of this Title: (1) When the whole of the price has not been paid or tendered; (2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise. In Articles 1525 to 1535 the term "seller" includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. 76. The seller in 1484 is also an unpaid seller, isn’t it? Yes. Would the general provisions of contract law be covered in this title? Yes. Is there overlapping between these remedies? No. How many remedies are there in 1484? Three. COMPARISON Coverage Remedy

1484 Installment of Personal Property By Judicial Action

1525 / 1526 Unpaid Seller Limited to those provided in the article

Scope

78. Does 1525/1526 only cover a lump sum? 79. Is 1484 available if the carrier holds the goods? 80. What are the factual antecedents in 1525? The seller of goods is deemed to be an unpaid seller within the meaning of this Title: (1) When the whole of the price has not been paid or tendered; (2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise. In Articles 1525 to 1535 the term "seller" includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. (n) 81. What is insolvency in 1525? Insolvency in this article is when the buyer has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not.15 JARA: Unlike the usual definition of insolvency, in this context, one is insolvent even when his assets are more than his liabilities. 82. If that is the concept of insolvency in 1525, can it also be applied in 1484? Yes. Article 1484 would apply if the vendee, who was paying the vendor in installments, later defaults in payment due to insolvency. (?) 83. Why is 1525 emphatic for the insolvency when it is not at all mentioned in 1484? 1525 mentions insolvency in relation to a conditional instrument’s cause for dishonor. 1484, however, simply recognizes that there is non-payment of an installment without regard for the reason behind it. (?) JARA: In the Insolvency Law, 1525 cannot seem to apply. 84. How can he make use of the rights of the unpaid seller?

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Villanueva, 369.

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By exercising any of the remedies under Art. 1526, to wit: Subject to the provisions of this Title, notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has: (1) A lien on the goods or right to retain them for the price while he is in possession of them; (2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them; (3) A right of resale as limited by this Title; (4) A right to rescind the sale as likewise limited by this Title. Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transitu where the ownership has passed to the buyer. (n) 85. May an unpaid seller carry out rescission extrajudicially? Yes. Under Art. 1534, an unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods, where he expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time. The seller shall not thereafter be liable to the buyer upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract. The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other overt act an intention to rescind. It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the right of rescission was asserted. 86. May an unpaid seller chose whatever remedy that he wants to do? No. The remedies are hierarchical in application. A remedy can only be availed when the preceding remedy in the hierarchy is not available. 87. How can the unpaid seller rescind or resell if he does not have control over the goods? To gain control over the goods, the unpaid seller must first exercise the first and second remedy under Article 1526, namely lien and stoppage in transitu. If he is unable to do so extrajudicially, he may opt for judicial action. 88. If the seller no longer possesses the goods, how can he avail of remedy #3 and #4?

Coverage: Articles 1458 to 1688

(V.2.7)

By exercising remedy #2 of Article 1526 (stoppage in transitu; also see Article 1530, CC) first, he may thereafter exercise #3 and #4. 89. How does the unpaid seller retain possession of the goods, if it is already with the possession of the carrier? Art. 1532. The unpaid seller may exercise his right of stoppage in transitu either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer. When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller. If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee, he shall not obliged to deliver or justified in delivering the goods to the seller unless such document is first surrendered for cancellation. 90. How is possessory lien of the unpaid seller lost? Art. 1529. The unpaid seller of goods loses his lien thereon: (1) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the ownership in the goods or the right to the possession thereof; (2) When the buyer or his agent lawfully obtains possession of the goods; (3) By waiver thereof. The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or decree for the price of the goods. 91. While the goods were in transit, buyer#1 sold the goods to buyer#2 is the sale valid? Why? It depends. If the sale was made with the assent of the seller or to a purchaser for value in good faith, the sale would be valid. Otherwise, the sale would generally be unenforceable since it was sold without authority/capacity. (?) Article 1535 provides – Subject to the provisions of this Title, the unpaid seller’s right of lien or stoppage in transitu is not affected by any sale or other disposition of the goods which the buyer may have made, unless the seller has assented thereto. If, however, a negotiable document of title has been issued for goods, no seller’s lien or right of stoppage in transitu shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether such negotiation be prior or subsequent to the notification to the page

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carrier, or other bailee who issued such document, of the seller’s claim to a lien or right of stoppage in transitu. Does buyer 2 acquire ownership of the goods? Buyer 2 acquires ownership if the seller assented to the sale, or if he was a purchaser for value in good faith to whom a negotiable document of title has been negotiated. (?) Can we say that it is valid at one point then later say that it is not valid? Yes. In a case where the unpaid seller has not yet exercised the remedies available to him and all elements of a contract of sale were present during the perfection of the contract, such sale may be deemed valid. Its invalidity happened during the consummation stage which concerns itself with the actual transfer of ownership of the subject matter and the payment of the price. The perfection stage merely concerns itself with the creation of the obligation to transfer and pay. (?) What factors do you think will determine whether or not the sale is valid? There are two: (1) sale or other disposition of the goods with the assent of the seller; and (2) the issuance of a negotiable document of title for goods to a purchaser for value in good faith. (Article 1535, NCC). Who is the owner, and what is the most important factor even if we don’t take into account the remedies? The owner of the goods is the holder of the negotiable document of title, even if such holder is a thief. The Civil Law assumes everyone is in good faith. ----------- End of Midterm Coverage -----------92. What is the first case? Naawan Community Rural Bank, Inc. v. CA & Sps. Lumo FACTS: In May 17, 1988, the Sps. Lumo purchased a residential house and lot with 340m2 from Comayas for the sum of 125K. Prior to their purchase, the spouses assured the legitimacy of their acquisition by inquiring about the property’s status from the Register of Deeds of Cagayan de Oro and the Bureau of lands. They settled a mortgage made by the vendor with a certain Mrs. Gallupo. Unfortunately, in 1989, they were called for ejectment by a sheriff. The ejectment was due to the fact that Naawan, the bank with whom Comayas mortgaged the property in 1983, foreclosed the land. The reason why the purchasers were not aware of such registration by Naawan was because the Register of Deeds of Cagayan de Oro City was established in 1984. Prior to that date, the Register of Deeds in Mizamis Oriental handled the titles.

Coverage: Articles 1458 to 1688

(V.2.7)

ISSUE: Whether or not Sps. Lumo may be considered as buyers in good faith and for value, thereby legitimate owners of the property. HELD: Yes. In dealing with subject registration, buyers are not required by law to go beyond the register to determine the legal condition of the property. Even assuming that the sheriff’s deed of final conveyance in favor of petitioner bank was duly recorded in the day book of the Registry of Deeds under Act 3344, ownership of the property would still be theirs as purchasers in good faith who registered first under the Property Registration Decree (Act 496). Article 1544 (formerly Art. 1473, Old Civil Code) only covers those registered under the Torrens Title System by Act 496. 16 Follow-up Questions for Naawan v. CA: How many contracts of sale are involved here? Two. Who was the seller? Comayas. Do you think 1544 is applicable in the antecedent facts if the vendors were different? No, 1544 will only apply for sales with the same immediate seller. The seller was the sheriff? Who is in the document of sale; it’s the sheriff, isn’t it? What is its business in selling the property sold? We should have a common seller, so who’s the common seller? So why use 1544? They should have used a different provision. When one element is not present (such as a different seller) we can’t use 1544, isn’t it? It was the bank that initiated the sale, how can the sheriff act on behalf of the seller? The sale is not signed by the seller, how can it be voluntary? JARA: It was really the owner who sold the property, because he gave authority to the bank to sell the property if he fails to pay. [The sheriff’s authority, therefore, was derived from the fact that Comayas mortgaged his property.] 93. What is the next case? Marciano Blanco v. Filemon Rivera (2006) FACTS: The parties are half-brothers who both claim ownership over a residential land. Petitioner Blanco claims that their mother, Eugenia Reyes vda. de Rivera, sold him the property in 1977. He wanted to claim and register the

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Digest by transcriptionist.

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property but Respondent Rivera, who held the title as co-owner, refused to furnish him the title. In 1980, the entire property was sold by Eugenia to Rivera through a quit claim deed with a consideration of P9,785. The land was thereby registered. In 1982, Blanco instituted proceedings in the barangay to uphold his claim over the property through a presentation of a deed of sale and an affidavit by his mother. Respondent Rivera denies prior knowledge of petitioners claim and, consequently, instituted ejectment proceedings against the petitioner – who occupied ¼ of the property in contention. The ejectment case, however, was decided in favor of petitioner Blanco. E converso, the RTC and CA decided in favor of the respondent, hence the case at bar. ISSUE: Whether or not the registration of respondent Rivera may be considered to be done with good faith and, hence, valid. DISPOSITIVE PORTION: Petition denied. CA affirmed. HELD: Yes, the affidavit (of the mother that the lot was sold to Blanco) taken ex-parte is generally considered inferior to testimonies in court. Even if the petitioners claims were true, he would still be estopped by laches.17 Follow-up Questions for Blanco v. Rivera: Who commenced the first action, the first buyer? The action filed was? Was there an eviction case? Who won the case? What was the action in the case about? o Did it succeed? o Who filed, was it the registered owner? o What should have been done by the first buyer in order to have claim over the property? o How do you propose an adverse claim if the buyer refuses to surrender the title? o What do you think is the form of an adverse claim? JARA: Eviction only involves a case of possession and not title. 94. Third case: Pudadera v. Magallanes.

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Case digest by transcriptionist.

Coverage: Articles 1458 to 1688

(V.2.7)

FACTS: Belen Lazaro was the absolute owner of a 5,333m2 lot at Arevalo, Iloilo City. The parcel was known as Lot 11-E. In 1979, she sold a 400m2 portion of the property for a sum of 22K to Daisy Magallanes under a “Contract To Sale” [sic] payable in 2 years. By 1980, Magallanes completed payment, so she fenced the property and constructed a nipa hut, right after a “Deed of Definite Sale” was executed in her favor. After Magallanes, Lazaro had 8 other buyers. Legal disputes, however, arose that Lazaro refused to turn over the mother title. Consequently, Magallanes and the other buyers filed an adverse claim with the Registry of Deeds and such was annotated on the title in 1981. While the case was pending, Lazaro sold Lot 11-E-8, the portion claimed by Magallanes and a Mario Gonzales: 800m2, to her neice (Lynn Lazaro) and the latter’s husband (Rogelio Natividad). Due to this second claim, Magallanes caused another annotation on the TCT in 1983. Notwithstanding the annotations, Sps. Natividad sold the property to Sps Pudadera in July 3, 1986. In defense, the petitioner, Sps. Pudadera, now claims that Lot 11E-8-B was the portion owned by the respondents – as evidenced by a zoning permit and their payment of real estate tax – and not Lot 11-E-8-A which they claim. In addition, they cite that the dismissal of the civil case involving the property was made in 1985; that the decision of the civil case was final and executory even if it was only annotated in July 7 (or 4 days after the property was sold to them) of the following year. The CA ruled in favor of the Magallanes. The case at hand is an appeal by husband Ireneo and heirs of deceased Daisy Magallanes. ISSUE: Who between the parties have a better right over Lot 11-E-8-A? HELD: The Magallanes. Well-settled is the rule that every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefore and the law will, in no way, oblige him to go beyond the certificate to determine the condition of the property. However, this rule shall not apply when the party has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry. The petitioners were aware or should have been aware of Magallanes’ prior physical possession and claim of ownership when they visited the lot on several occassions. They cannot be considered buyers in good faith. DISPOSITIVE PORTION: Partially Granted. Affirmed with modifications: Certificate of title must be for Magallanes while Attorney’s fees are deleted (rationale: petitioners’ bad faith in the institution of the subject action is wanting). Follow-up Questions for Pudadera v. Magallanes: What would equate to good faith? page

S a n B e d a C o l l e g e o f L a w – M e n d io l a , M a n il a

“That in all things, God may be glorified.”

Transcribed By Valera, C.A.M. (2-J)

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S A LE S & L E A S E -

(recitation questions of Dean Jara)

Coverage: Articles 1458 to 1688

Should it always be at its face?

95. In a sale, what is the concept of warranty? Warranty may be expressed or implied. Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchases the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller’s opinion only, shall be construed as a warranty, unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer (Art. 1546, NCC). Expressed warranty makes the seller liable for damages when there is a breach of obligation. Here there must be (a) An affirmation of fact or any promise by the seller relating to the subject matter of the sale; (b) The natural tendency of such affirmation or promise is to induce the buyer to purchase the thing; and (c) The buyer purchases the thing relying on such affirmation or promise thereon. On the other hand, implied warranties are those which by law consitute a part of every contract of sale, whether or not the parties were aware of them, and whether or not the parties intended them.18 In a contract of sale, unless a contrary intention appears, there is: (1) An implied warranty on the part of the seller that he has a right to sell the thing and the time when the ownership is to pass, and that the buyer shall from the time have and enjoy the legal and peaceful possession of the thing; (2) An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. This article shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or law, for the sale of a thing in which a third person has a legal or equitable interest (Art. 1547, NCC). 96. Would it differ from a condition? Yes, specifically as follows:19 Condition Effect on Non-happening Contract of = Extinguishes the obligation Sale (generally does not amount to a

Obligation

Form

Stipulated

Attaches to

Either the buyer or the seller

Villanueva, p. 493-495. 19 Villanueva, p. 491-492.

Goes into performance of such obligation and in fact may constitute an obligation in itself. Expressed or Implied (by law) The subject matter or to the obligations of the seller as to the subject matter

97. The warranty would always refer to a seller? No, it may also apply to his agent. Although only a seller is bound by the implied warranties of law, nevertheless, by express contractual stipulation, an agent of the seller may bind himself to such warranties.20 98. If we would have a good and, on it, we see “warranties of a seller” it’s okay. How about “warranties of a buyer”? Warranties of a seller would be okay. It is the seller who gives the warranty. The buyer’s obligation is limited to acceptance of the delivery and payment of such. He does not need to provide the seller for a warranty for the seller’s own goods. (?) a. b.

c. d.

e. f.

Warranty Non-fulfillment = Breach of contract

                                                                                                               

breach of contract) If the party has promised the condition to happen or to be performed, the other party may also treat the non-performance as a breach of warranty. Generally goes into the root of the existence of the obligation.

Breach of Warranty

(V.2.7)

“Warranty of a buyer,” it can be done? Give an example. If the buyer makes the warranty and the buyer breaks a warranty may he be liable for breach of such warranty? Will it always relate to his obligation to pay? Isn’t it obnoxious for the buyer to induce the seller to sell; is it not that it’s the seller that induces the buyer to buy? Why cannot the buyer make a warranty? But can the buyer make a warranty that will induce the seller to sell the property?

                                                                                                               

18

20

Villanueva, p. 295.

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S A LE S & L E A S E

(recitation questions of Dean Jara)

Coverage: Articles 1458 to 1688

(1) Potestative – when the fulfillment of the condition depends upon the will of a party to the obligation. (2) Casual – when the fulfillment of the condition depends upon chance and/or upon the will of a third person. (3) Mixed – when the fulfillment of the condition depends partly upon the will of a party to the obligation and party upon chance and/or the will of a third person.

JARA: The law says that, when there is a warranty of a seller, it may be expressed or implied. The buyer has remedies so that the seller will be liable. 99.

Do you think it is legally feasible for the buyer to make warranties/remedies for the seller?

JARA: There is a difference between a warranty and a condition. A warranty is a fact. A condition is something which may or may not happen; a suspensive and a resolutory condition are its kinds. What is your concept of a suspensive and resolutory condition? According to the first and second paragraphs of Art. 1193, a period may be suspensive (ex die) or resolutory (in diem). It is suspensive when the obligation becomes demandable only upon the arrival of a day certain; it is resolutory when the obligation is demandable at once, although it is terminated upon the arrival of a day certain.21

c.

As to possibility. (1) Possible – when the condition is capable of realization according to nature, law, public policy, or good customs. (2) Impossible – when the condition is not capable of realization according to nature, law, public policy or good customs.

d.

As to mode. (1) Positive – when the condition involves performance of an act. (2) Negative – when the condition involves non-performance of an act.

e.

As to divisibility. (1) Divisible – when the condition is susceptible of partial realization. (2) Indivisible – when the condition is not susceptible of partial realization.

f.

As to numbers. (1) Conjunctive – when there are several conditions, all of which must be realized. (2) Alternative – when there are several conditions, one of which must be realized.

g.

As to form. (1) Express – when the condition is stated expressly. (2) Implied – when the condition is tacit (8 Manresa, 5th Ed. Bk. 1, pp. 323-324).22

100.

101. Again, what is the definition of Sale? Based on Article 1458 of the NCC: By a contract of sale, one of the contracting parties obligates himself to transfer the ownership of and deliver a determinate thing, and the other to pay therefore a price certain in money or its equivalent. A contract of sale may be absolute or conditional. 102.

We are interested with the condition. A condition, should it always be resolutory, or may it be suspensive? No, there are different kinds of conditions. Traditionally, there are seven (7) classifications. Suspensive and resolutory conditions fall upon the classification under effect. a.

b.

Give an example. As to effect. (1) Suspensive – when the fulfillment of the condition results in the acquisition of rights arising out of the obligation. (2) Resolutory – when the fulfillment of the condition results in the extinguishment of rights arising out of the obligation. As to cause or origin.

                                                                                                                21

Desiderio P. Jurado, CIVIL LAW REVIEWER, 21st ed. (Manila: Rex Bookstore, 2009), p. 730-731.

(V.2.7)

103. Can you make that condition a warranty? Not in all cases. Generally, warranties are only classified as express or implied. As such, it can only apply to conditions as to form. 104. What are the 5 warranties? Under Article 1555 of the Civil Code is the following: When the warranty has been agreed upon or nothing has been stipulated on this point, in case eviction occurs, the vendee shall have the right to demand of the vendor:

                                                                                                                22

Jurado, p. 720-721; and the classification based on De Leon’s textbook on Obligations and Contracts.

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(recitation questions of Dean Jara)

Coverage: Articles 1458 to 1688

(A) In case of rescission or damages: a. The buyer may either bring an action for rescission or sue for damages only if he does so within one (1) year computed from the execution of the deed. b. If such one year period has lapsed, the buyer may only bring an action for damages within an equal period, to be counted from the date on which he discovered the burden or servitude (Art. 1560, NCC).24

(1) The return of the value which the thing sold had at the time of the eviction, be it greater or less than the price of the sale; (2) The income of fruits, if he has been ordered to deliver them to the party who won the suit against him; (3) The costs of the suit which caused the eviction, and, in a proper case, those of the suit brought against the vendor for the warranty; (4) The expenses of the contract, if the vendee has paid them; (5) The damages and interests, and ornamental expenses, if the sale was made in bad faith.

(B) In case of hidden defects: Actions on warranties against hidden defects shall be barred after six (6) months from the delivery of the thing sold (Art. 1572, NCC).25

105.

Since you have used the words “unless otherwise,” may the exclusionary clause provided for in the warranties be considered as express warranties? Yes, stipulations are considered as express warranties.

(C) In case of animals: a. The redhibitory action based on the faults or defects of animals must be brought within fourty (40) days from the date of their delivery to the buyer (Art. 1577, NCC). b. If the animal should die within three (3) days after its purchase the vendor shall be liable if the disease which cause[d] the death existed at the time of the contract (Art. 1578, NCC). NOTE: When the buyer returns the objects bought and demands the payment of the purchase price, he is in effect “withdrawing from the contract” as provided in Article 1567, where the prescriptive period is six months from the delivery of the thing sold.26

106.

There is an express warranty against eviction, will it really benefit the vendee? Ideally, the warranty should benefit the vendee since by definition a warranty should induce the vendee to purchase the good/property. (?) 107.

As long as there is a breach and there is a warranty, whether it is an expressed or implied one, is it really meant for the protection of the vendee? The warranty mainly protects the vendee, but it also limits or defines his actions against the seller. (?) 108.

What benefit will the vendee get out of it when the warranty is expressed against when it is implied? When the warranty is expressed, the vendee is certain as to what extent the vendor may be held liable in addition to what is provided by law. It will be easier to seek damages, as opposed to implied warranty where the buyer will be limited to what is provided by law. (?)

(D) In case of consumer goods: a. The seller and the consumer may stipulate the period within which the express warranty shall be enforceable. b. But if the implied warranty on merchantability accompanies an express warranty, both will be of equal duration. c. Any other implied warranty shall endure not less than sixty (60) days nor more than one (1) year following the sale of new consumer products. NOTE: All covenants, stipulations, or agreements contrary to the provisions of Article 68 (of RA 7394: Consumer Act of the Philippines) are specifically declared null and void and without legal effect.27

109.

If these warranties remain to be implied, don’t you think that the vendee can still run after the vendor? Yes, the vendee may run after the vendor. Implied warranties are those which by law constitute part of every contract of sale, whether or not the parties were aware of them, and whether or not the parties intended them.23 110. What is the time of prescription? There are different prescriptive periods for different cases, viz:

                                                                                                               

(V.2.7)

                                                                                                                Villanueva, p. 502. Villanueva, p. 506. Dino v. CA, 359 SCRA 91 (2001) as cited in Villanueva, p. 507. 27 Villanueva, p. 512-514. 24 25 26

23

Villanueva, p. 495.

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(recitation questions of Dean Jara)

a. 6 months, from delivery? The warranty against hidden defects shall be barred after 6 months from the delivery of the thing sold (Art. 1572, CC). b.

c.

111.

When it comes to animals, it is reduced to? Within 40 days for faults and defects, and within 3 days for death by disease existent at the time of contract. When it is an immovable? 1) After 1 year, what is the remedy? The buyer may only bring an action for damages with an equal period to be counted from the date on which he discovered the burder or servitude. 2) Within that 1 year, what action can you file? Based on Art. 1560, an action for rescission or sue for damages.

What is an express warranty against hidden defect? Express warranty is a stipulated guarantee by the vendor to the vendee involving hidden defects of the thing sold.

Since the breach of an express warranty makes the seller liable for damages, it is important to note that the following requisites are necessary in order that there be an express warranty in a contract of sale: (a) It must be an affirmation of fact or promise by the seller relating to the subject matter of the sale; (b) The natural tendency of such affirmation or promise is to induce the buyer to purchase the thing; and (c) The buyer purchases the thing relying on such affirmation or promise thereon.28 (?) Can we change the prescriptive period? No. Since the law, under Art. 1571 mandates that actions on warranties against hidden defects shall be barred after 6 months from the delivery of the thing sold. (?) a. b.

Is it a valid stipulation to make it 5 years? Have you come across a provision in Sales for a prescriptive period for an express warranty? c. So, can they stipulate that “an action for the breach of the express warranty will not prescribe”? JARA: What the Torrens Law says is that you cannot put a prescriptive period for the title.

                                                                                                                28

Villanueva, p. 493-494; Art. 1546, CC; Also Carrascoso, Jr. v. CA, 477 SCRA 666 (2005)

Coverage: Articles 1458 to 1688

(V.2.7)

d.

So, in other words, if they stipulate such nonprescription of the warranty they don’t need to follow the provisions of prescription in the Civil Code. JARA: There is a chapter on prescription – instinctive and acquisitive. e.

Supposing that the Civil Code provides for 4 years, may they go against this by stipulating otherwise? May they put it for 6 years?

112. What is the scope of warranty against hidden defects? Under Article 1561 of the Civil Code, the seller shall be responsible for warranty against “hidden defect” which means: (a) Only when the nature of the hidden defect is such that it should render the subject matter unfit for the use for which it is intended; or (b) Should diminish its fitness for such use to such an extent that had the buyer been aware thereof, he would not have acquired it or would have given a lower price for it. The seller is not answerable for patent defects or those which are visible, or even for those which are not visible if the buyer is an expert who, by reason of his trade or profession, should have known them. The seller is responsible to the buyer for any hidden faults or defects in the thing sold, even though he was not aware thereof (Art. 1566, NCC). 113. What is a sale on “as is” and “where is” basis? The phrase “as is and where is” (which has been adopted from dispositions of army surplus property) means nothing more than that the vendor makes no warranty as to the quality or workable condition of the goods, and that the vendee takes them in the conditions in which that they are found and from the place where they are found and from the place where they are located. It does not extend liens or encumbrances unknown to the vendee and could not be disclosed by a physical examination of the goods sold. (Monfort v. Willis, [CA] No.6964-R, October 15, 1951) The term “as is” in public auction of (imported) goods refers to the physical condition of the merchandise and not the legal situation in which it was at the time of the sale. It has no bearing at all on the obligation of the seller (Bureau of Customs) under Article 1495 “to ransfer the ownership and deliver, as well as warrant the thing which is the object of sale.” This warranty is as to the right and capacity to deliver. ( Auyong Hian v. Court of Tax Appeals, 109 SCRA 470 [1981]).29 a.

Why is there no implied warranty?

                                                                                                                29

Hector S. De Leon, “Comments and Cases on Sales and Lease,” 6th ed. (Manila: Rex Bookstore, 2005), p. 300.

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(recitation questions of Dean Jara)

Coverage: Articles 1458 to 1688

1) Can the vendor and vendee stipulate that there is no such warranty on the part of the vendor? Yes. The code provides in the first paragraph of Art. 1547 that “unless a contrary intention appears.”

Because it must be understood from the terms, that the buyer gets what he sees, and that the buyer is presumed to know what he is buying. (?) b.

c.

What else? In second hand items? There is no implied warranty as to the condition, adaptation, fitness or suitability for the purpose for which made, or the quality of an article sold as and for second-hand article. But such articles might be sold under such circumstances as to raise an implied warranty. A certification issued by the vender that a second-hand machine was in A-1 condition is an express warranty binding on the vendor. (Moles v. Intermediate Appellate Court 169 SCRA 777 [1989]).30 If the thing sold is brand new, is there an implied warranty against hidden defect? Yes, there is an implied warranty, however there is no warranty of title for a sale which is by virtue of authority in fact or law, as mentioned in the Civil Code – In a contract of sale, unless a contrary intention appears, there is: o An implied warranty on the part of the seller that he has a right to sell the thing at the time when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal peaceful possession of the thing; and o An implied warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. These warranties, however, do not mean that a sheriff, auctioneer, mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or in law, can be held liable for the sale of a thing in which a third person has a legal or equitable interest (Art. 1547, NCC). In the sale of goods, there is an implied warranty as to the quality or fitness of the goods as follows: (1) Where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the seller’s skill or judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose; and (2) Where the goods are bought by description from a seller who deals in goods of that description (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality (Art. 1562, NCC).

                                                                                                                30

De Leon, p. 301.

(V.2.7)

114.

You are the lawyer of the vendee. The vendor offers that the warranty may be waived, what leverage can you get by putting away such warranty? Leverage may be stipulated by a meeting of minds. (?) JARA: The law says that an implied warranty could be suppressed because it results into the reduction of the purchase price. 115.

Do you think that there should also be a prescriptive period for breach of warranty against eviction? Yes, such is provided for in the Code. a.

What is the period: how many days and from what point? Generally, the period of prescription is 6 months (Art. 1571, NCC). Howerver, in redhibitory actions based on the faults or defects of animals, the period is 40 days (Art. 1577, NCC). Whether 6 months or 40 days, the period must be counted from the date of delivery to the vendee.31

b.

How long after final judgment? STUDENT: The 5 year period from the time the action accrues. JARA: ? c. What may the vendee seek within 1 year? d. If he is not deprived of possession may he still avail of such warranty? JARA: If you read the chapter in prescription, in instances where the law does not prescribe, the prescription of 5 or 6 years, I think, shall apply. So, should we have one (prescription of 5 or 6 years)? Isn’t 10 years too long? What is the period for movables? 116. What are the essential requisites of eviction? Warranty in case of eviction is an implied warranty in contracts of sale, by virtue of which if the vendee is deprived of the who or a part of the thing purchased by a final judgment based on a right prior to the sale or an act imputable to the vendor, such vendor shall answer for the eviction even

                                                                                                                31

Jurado, p. 984.

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(recitation questions of Dean Jara)

Coverage: Articles 1458 to 1688

though nothing has been said in the contract of such subject. (Art. 1548, NCC.)

Because it is part of the obligation of the vendee to accept the delivery, his nonpayment will not extinguish such obligation. However, if the vendee cannot pay the price, the unpaid seller shall have the right to exercise the remedies found under Article 1426 of the Civil Code.

In order that such warranty may be enforced it is essential that the following requisites must concur: (1) Deprivation of the vendee of the whole or part of the thing purchased; (2) The deprivation must be by virtue of a final judgment; (3) The deprivation must be based on a right prior to the sale or an act imputable to the vendor; (4) The vendor must be summoned in the suit for eviction at the instance of the vendee. (Arts. 1548, 1558, NCC.) a.

Who are your plaintiff and defendant for you to have a final judgment? Based on Art. 1588 (4) of the NCC, the vendor must be summoned in the suit for eviction at the instance of the vendee. Consequently, the vendee would be the plaintiff while the vendor would be the defendant.

b.

You are contemplating a case of Juan Dela Cruz against or filled by the vendee? We are talking about a movable or immovable? An immovable. Eviction involves ejectment, therefore, the property or thing referred to must be immovable such as a piece of land or a unit of property where one may remain or reside.

c.

Even if the vendee is evicted, he cannot complain? The law prescribes that the vendor must be made a party to the case? He may still complain. The provision wherein the vendor must be made a party to the case is when the case involves an enforcement of warranty in an eviction case. (?) JARA: It will be determined by the Rules of Court. A period to answer [for the vendor] is only 15 days, or depending on the circumstances. The period where the vendor can be impleded will be a much shorter period.

b.

Obligations of the vendee? Based on Art. 1582 of the Civil Code, the vendee is bound to accept delivery and to pay the price of the thing sold at the time and place stipulated in the contract. If the time and place should not have been stipulated, the payment must be made at the time and place of the delivery of the thing sold. a. What if he cannot pay the price, what happens to acceptance?

If the parties do not agree in the time frame of acceptance, what happens? Acceptance may be implied by their acts and obligation still exists between the parties, and the court may set a period for them. The relevant provisions for this scenario are as follows: Art. 1586. In the absence of express or implied agreement of the parties, acceptance of the goods by the buyer shall not discharge the seller from liability in damages or other legal remedy for breach of any promise or warranty in the contract of sale. But, if, after acceptance of the goods, the buyer fails to give notice to the seller of the breach in any promise of warranty within a reasonable time after the buyer knows, or ought to know of such breach, the seller shall not be liable therefor. Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.

117.

118.

(V.2.7)

119.

If the vendee has not expressly manifested his acceptance of the goods, what conduct of the vendee can be used to make the inference that he has accepted the goods? According to Art. 1585: The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him, and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them. (n) 120.

After delivery of the goods, the vendor says “I am not accepting the goods.” Can he still be compelled to pay the purchase price? His obligation to pay depends on the quality of the delivery. If his refusal to pay is not valid, he may still be compelled by the seller to pay the purchase price, based on Art. 1588: “If there is no stipulation as specified

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Coverage: Articles 1458 to 1688

in the first paragraph of article 1523, when the buyer's refusal to accept the goods is without just cause, the title thereto passes to him from the moment they are placed at his disposal.”

Generally, it is not his duty to return the goods. Art. 1587 provides that “unless otherwise agreed, where goods are delivered to the buyer, and he refuses to accept them, having the right so to do, he is not bound to return them to the seller, but it is sufficient if he notifies the seller that he refuses to accept them. If he voluntarily constitutes himself a depositary thereof, he shall be liable as such.”

However, if his refusal is justified due to a breach by the seller, the buyer may not be compelled to pay the price; and the buyer may avail of the remedies under Article 1599 of the Civil Code – Where there is a breach of warranty by the seller, the buyer may, at his election: (1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment in diminution or extinction of the price; (2) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty; (3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty; (4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid. When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191. Where the goods have been delivered to the buyer, he cannot rescind the sale if he knew of the breach of warranty when he accepted the goods without protest, or if he fails to notify the seller within a reasonable time of the election to rescind, or if he fails to return or to offer to return the goods to the seller in substantially as good condition as they were in at the time the ownership was transferred to the buyer. But if deterioration or injury of the goods is due to the breach or warranty, such deterioration or injury shall not prevent the buyer from returning or offering to return the goods to the seller and rescinding the sale. Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to be liable for the price upon returning or offering to return the goods. If the price or any part thereof has already been paid, the seller shall be liable to repay so much thereof as has been paid, concurrently with the return of the goods, or immediately after an offer to return the goods in exchange for repayment of the price. Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter be deemed to hold the goods as bailee for the seller, but subject to a lien to secure payment of any portion of the price which has been paid, and with the remedies for the enforcement of such lien allowed to an unpaid seller by Article 1526. (5) In the case of breach of warranty of quality, such loss, in the absence of special circumstances showing proximate damage of a greater amount, is the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty.

a. b.

The vendee has the prerogative to not set the rules? If the vendee refuses to accept, is it his duty to return the goods?

(V.2.7)

c.

Isn’t it that the law provides that if the vendee refuses to accept, a new relationship is created: a bailor-bailee relationship? Such new relationship is not automatic. Under the same provision cited above the qualifying phrase is “if he voluntarily constitutes himself a depositary thereof, he shall be liable as such.”

d.

Supposing he does not constitute himself as bailee, and the goods are lost, should he deposit the goods with the court? 1) Does the law require him to do so?

121.

In a contract of sale, what is the meaning of an automatic cancellation clause? It is a stipulation in an agreement that automatic rescission of the contract of sale shall be made when there is nonpayment of the purchase price. As a general rule, the vendor may sue for rescission of the contract should the vendee fail to pay the price. The sale of real property, however, is subject to the stipulations agreed upon by the parties and to the provisions of Article 1592 (De Leon, 2005)32 Art. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. a.

If the thing sold is real property, can we also have such clause? Yes, but such will be void. According to Article1592 there should be demand and a notarial act before rescission may occur. As such, there is no automatic cancellation.

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/ejlvillena. 2008 – Jara Notes

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Coverage: Articles 1458 to 1688

Furthermore, special laws protect the buyer from such an iniquitous provision. b.

a.

How do we carry out a cancellation clause, if there is no need for intervention? Since it may be carried out judicially or by a notarial act, the notarial act is an extrajudicial act and there would be no need for court intervention.

c.

Is it really automatic? No (See the answer in 121, (a)).

d.

Do we apply an automatic cancellation clause in a contract to sell? Yes, but such automatic cancellation would not be based on Art. 1592, but on the provisions of the agreement by the parties. In a contract to sell, the vendor has maintained ownership to ensure the buyer’s compliance.

b. c. d. e. f.

g.

The distinction between contract of sale and contracts to sell with reserved title has been recognized by the Supreme Court in repeated decision upholding the powers of promissors under contracts to sell in case of failure of the other party to complete payment, to extrajudicially terminate the operation of the contract, refuse conveyance, and retain the sums or installments already received where such rights are expressly provided for.33 122.

Give us the Civil Code provision in the case of a piece of land (for automatic cancellation)? Art. 1592, NCC. Art. 1592 Maceda Law Immovable property RA 6552: Realty Covers (Contract of Sale ONLY; Not applicable to a Contract to Sell)

Rescission by Major provision Period of default

Judicial or notarial act The vendee may pay even after the expiration of the period, as ong as no demand for rescission has been made Once: “upon failure to pay the price agreed upon”

Installment Buyer Protection Act (Real Estate, excluding industrial lots, commercial buildings, & sales to tenants) Extrajudicial act

h. i.

60-day grace period if the installments paid is for less than 2 years; and and additional 1 month grace period for every additional year of installment.

(V.2.7)

Do you think the provision of this code is still applicable with the existence of the Maceda Law? Yes. So both Maceda Law and 1592 governs a “Contract of Sale”? Can the it stand together? Yes, and the two can stand together. Is there also rescission under the Maceda Law? Yes. Is there no conflict? There is none. What are those not govenerd by the Maceda Law? Industrial lots, commercial buildings, & sales to tenants. What is included by the Maceda Law? Real estate – as implied by those included (residential and condominum appartments) and excluded, the law focuses on residential property. The period, how much shorter is it against 1592? The period is not shorter, but longer. The Maceda Law provides for at least 60 days, while Article 1592 only considers one instance of nonpayment. 1) So, automatic rescission does not really happen automatically? Yes, it does not. A judicial or an extrajudicial act of demand must first be made. 2) Don’t you think 1592 is more liberal with regard to the purchase price? 1592, does not affect the purchase price. It sets an action to rescind the contract. 3) Is there a recovery in rescission? The vendor may recover the property, but no longer demand for the fulfillment of the purchase price. Does not the law give mutual restitution? 1) In 1592, does he get full restitution? Will not the amount be much larger? How long do you recover the possession of the property when there is a notarial rescission? Under the Maceda Law, 30 days after the notarial act of “notice of cancellation” or “demand for rescission of contract” there may be a cancellation of contract. Once the contract is cancelled, possession may be demanded by the vendor, through the sheriff.

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Jurado, p. 986; Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc, 43 SCRA 93.

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123.

Under the code, when can the payment of a purchase price be suspended? Based on Art. 1658 of the Civil Code, there are two instances for the suspension of purchase price with respect to lease. “ The lessee may suspend the payment of the rent in case the lessor fails [a] to make the necessary repairs or [b] to maintain the lessee in peaceful and adequate enjoyment of the property leased. (are there more?) 124.

Don’t you think Chapter 6 (Actions for breach of contract of sale of goods) is already covered by other Articles, like 1191? Yes, it is also covered by Article 1191; but chapter 6 specifically covers sale of goods while Article 1191 covers all obligations. The difference is elucidated by the first provision of Chapter 6, namely Article 1594: “Actions for breach of the contract of sale of goods shall be governed particularly by the provisions of this Chapter, and as to matters not specifically provided for herein, by other applicable provisions of this Title.” 125.

Chapter 6 covers warranty against “hidden defects”? Yes.

126. What is a “redhibitory effect”? The redhibitory action is an action instituted to avoid a sale on account of some vice or defect in the things sold which renders the use impossible.34 The effect of such will release the vendee from his obligation against the vendor due to the vice or defect of the thing sold. 127.

In that long Article in Chapter 6… It has something to do with the rights of the unpaid seller. This time, it is exercised by the buyer. How does that work? Such long article in Chapter 6 is 1599. The last paragraph of the 4th item of Article 1599 provides: XXXX (4) …Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter be deemed to hold the goods as bailee for the seller, but subject to a lien to secure payment of any portion of the price which has been paid, and with the remedies for the enforcement of such lien allowed to an unpaid seller by Article 1526. The right of an unpaid seller is then exercised with respect to the lien that a buyer may have on the goods, to wit – Article 1526, (1) – “A lien on the

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De Leon, p. 318.

Coverage: Articles 1458 to 1688

(V.2.7)

goods or right to retain them for the price while he is in possession of them.” a.

In addition to his rights under Article 1599, he may exercise the rights of an unpaid seller. He can what? Yes. When the buyer has a right to rescind the sale but the seller refuses to accept the return, the buyer would be deemed as bailee for the seller. The buyer will have a right to retain the goods, just like an unpaid seller in order to secure the price that he had paid.

128. The causes that will extinguish a sale? Sales are extinguished by the same causes as all other obligations, and also by conventional or legal redemption. (Art. 1600, NCC.) Accordingly, other obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code (Art. 1231, NCC). 129.

Give the distinctions between conventional and legal redemption. Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon (Art. 1601, NCC). Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title (Art. 1619, NCC). 130. What are the periods? The period varies. In case of conventional redemption, in the absence of an express agreement, shall last four years from the date of the contract. Should there be an agreement, the period cannot exceed ten years. However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase (Art. 1606, NCC). Generally, in legal redemption, “the right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case page

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may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners. The right of redemption of coowners excludes that of adjoining owners (Art. 1623, NCC).” However, aside from what is provided in the Civil Code, there are different periods of prescription for legal redemption, as such right to redeem is derived from law. Some other instances when right of legal redemption is granted are within as follows: a. Homesteads – 5 years from date of conveyance; b. Tax Sales – 1 year from date of sale; c. Judgment Debtor – 1 year from the date of registration; d. Extrajudicial foreclosure – 1 year; e. Judicial Foreclosure – 90 days; f. Foreclosures by Banking Institutions – 1 year after sale of real estate; g. Rural Bank Forecloses – 2 years from the registration of sheriff’s certificate of sale, or 5 years from expiration of period by heirs; and h. Agrarian Reform Code – 180 days from notice. 35

131. What is pre-emption? Pre-emption is the right of an owner to buy a piece of land over others. This right of pre-emption may only be exercised by the owner of an adjoining urban land, to wit: Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of pre-emption at a reasonable price. If the re-sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price. When two or more owners of adjoining lands wish to exercise the right of pre-emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred (Art. 1622, NCC). Moreover, the right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners. The right of redemption of co-owners excludes that of adjoining owners (Art. 1623, NCC). a.

For example, a co-owner sold a property. His co-owner has the right of legal redemption. Can he also have the right of pre-emption? How? If he is the owner of an adjoining urban land to that property which was sold, and that such property sought to be redeemed is so small that it would be inutile if it were not part

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Villanueva, p. 561-567.

Coverage: Articles 1458 to 1688

(V.2.7)

of another property, then YES – he can have both right of legal redemption, as a co-owner; and a right of pre-emption as an owner of an adjoining piece of urban land. 132. In other words, pre-emption is a right of first refusal? Yes, it may be considered as a right of first refusal since the owner of the adjoining piece of urban land must first decline to purchase such property. (?) 133.

In one and the same sale of a parcel of land, can we have one and both conventional and legal redemption? Yes. a.

Suppose that the conventional redemption belongs to the vendor de retro while the legal redemption belongs to the adjoining owner, how will the vendee decide now? The autonomy of contracts, as long as not contrary to law, must first be exercised. As such, the right of conventional redemption by the vendor de retro must first be exercised, or prescribe before the right of legal redemption may be applicable. (?)

b.

The one who is given the right of legal redemption cannot redeem the property? The right to exercise the right of redemption falls on a case to case basis. The right of legal redemption cannot be applied until conventional redemption is first settled. (?)

c.

If the vendor de retro gets back the property, may the one with a right of legal redemption get it away from him? (because you said that the two can exists together) No, the one with the right of legal redemption may not get the property from him, since such right was only present when he sold the property as vendor de retro. Having exercised his right to redemption, the right of legal redemption is no longer available. (?)

d.

There is conventional redemption and legal redemption existing together. Possible? STUDENT: Sir, if a co-owner sold his property as a vendor de retro, he has rights from both conventional and legal redemption. e.

What if his co-owner, who also has the right of legal redemption to the property that the co-owner vendor page

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de retro sold, also exercises his right of legal redemption? (JARA: Remember, legal redemption arises from law.) The co-owner may not exercise his right until the vendor de retro forfeits his right to redeem. (?) f.

So the two cannot co-exist? The two can co-exist, however, they may not be practiced at the same time. One is prioritized over the other. (?)

g.

Can one stem-out from the other? Yes. A vendor de retro, may also have a right of legal redemption after he loses his property. (?)

134.

What if there are 2 other co-owners of the land sold by a vendor de retro? (JARA: Legal redemption is a right, isn’t it? The vendee cannot do anything to prevent such exercise of right.) According to the second paragraph of Article 1620, when there are two or more co-owners who desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common.

Coverage: Articles 1458 to 1688

(3) the sale must be to a third person. a.

In our example (#135 and 137), don’t you think that all the elements are present? No. All the elements are not present because the sale is not to a third person. JARA: It is a state policy to discourage co-ownership. Commentaries on the book were based on the Code Commission. 139.

Does the law distinguish between a “pacto de retro sale” and an “absolute sale” to a third party? The law does not use the term “pacto de retro” however, from its provsions such may be implied from the definition of conventional redemption. As such, the two are distinguished. The former in conventional redemption and the other in a usual contract of sale. (?) a. It just says to a third party, isn’t it? Yes. 140. What is assignment? Under Article 1624 of the Civil Code, “assignment” is in fact the sale of credits and other incorporeal rights.

If co-owner #1 redeemed the property, but after #1 redeemed the property, co-owner #3 now wants to exercise his right of legal redemption, may he still do so? No, co-owner#3 no longer has the right of legal redemption. Based on the provision of Article 1620, for a co-owner of a thing to have a right of redemption, the sale must be to a third person. In the case given, the property now belongs to a co-owner.

a.

Is it different from a sale? Although credits and other intangible things within human commerce are the proper object of a contract of “sale” as defined in Article 1458 of the Civil Code, “assignment” is the proper or rather technical, term that should be used. Therefore, although “Deed of Sale of Shares of Stock” is legally correct, it is technically inaccurate, since the proper term is “Deed of Assignment of Shares of Stock.” 36

b.

Is it governed by the provisions on the Chapter on Sales? No. If “sale” and “assignment” are legally the same contracts, but with different names, the logical question would then be: Why does our Civil Code provide for a separate chapter under the Title on Sales to cover assignments, Chapter 8 – Assignment of Credits and Other Incorporeal Rights? Although sale and assignment are not technically the same, they are not however different, because they come from the same root or genus, which happens to be called “sale” also; consequently, the law must take up special matter peculiar to the sale of

135.

136.

Is there anything in the Civil Code that one right (of redemption: conventional or legal) is preferred over the other?

No. 137.

If co-owner#1 sells his share to #2. Co-owner #3 cannot have the right to redeem, isn’t it? Yes, since the sale is not to a third person (see Art .1620). What are the elements to create a legal redemption by coowners? Based on Art. 1620 of the Civil Code, there are three: (1) There must be a co-owner of a thing; (2) the shares of all the other co-owners or of any of them, are sold; and

(V.2.7)

138.

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Villanueva, p. 568.

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intangibles. Assignment therefore is a species of the genus sale, defined in Article 1458 of the Civil Code. c.

If it is governed by the Chapter on Sales, can we have an assignment with the right to repurchase?

141.

Is there anything that would prevent “right of repurchase” between the assignor and the assignee? No, there is none. a. Assuming they have come to that agreement, will that assignment be void? No. There is nothing in the code that will make such an assignment void. (?)

142. Yes.

A “pacto de retro transaction” can be applied on assignment? a.

How about warranties on assignment? Since assignment concerns intangibles, a different kind of warranty applies, to wit: The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge. Even in these cases he shall only be liable for the price received and for the expenses specified in No. 1 of Article 1616. The vendor in bad faith shall always be answerable for the payment of all expenses, and for damages. (Art. 1628, NCC.) In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after the maturity. (Art. 1629, NCC.)

b. 143.

Can we not allow an “equitable mortgage” in the assignment of credit?

In what cases may a sale be considered as an equitable mortgage? The contract shall be presumed to be an equitable mortgage, in any

Coverage: Articles 1458 to 1688

(V.2.7)

of the following cases: (1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (Art. 1602, NCC.) a.

Will the role of the parties change? Yes, instead of vendor-vendee there will be a mortgagormortgagee.

b.

Who will be the mortgagor and the mortgagee? The vendor will be the mortgagor while the vendee will be the mortgagee. (?)

144.

The payee of the promissory note, can he sell the promissory note? Yes, unless there is an agreement to the contrary. (?) 145. Is there a difference between a “sale” and an “assignment”? Yes, although sale may cover assignment, assignment is the proper term used to cover the sale of credits and other incorporeal property. Consequently, assignment may not be used to describe the sale of tangibles. 146.

If we have a promissory note, say for 1M. It is assigned to Juan Dela Cruz. Is it valid? Yes.

147. If there is a promissory note. Who runs after the debtor? The holder of the promissory note may run after the debtor. (?) 148.

EXAMPLE: The assignor is in need of money so he sells the promissory note (PN), worth P1M, for 800K to the assignee.

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149.

(recitation questions of Dean Jara)

a.

Can the assignee compel the debtor to pay P1M, even if he paid only 800K? Yes. The assignee is a third party in the relationship between his assignor and its debtor. There is no change in the debt due from the debtor to its creditor – who is also the assignor in this case. There is merely a subrogation of rights from the assignor to the assignee. (?)

b.

Under the code, what are the defenses that can be exercised by the debtor against the assignee? When a credit or other incorporeal right in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefor, the judicial costs incurred by him, and the interest on the price from the day on which the same was paid. A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same is answered. The debtor may exercise his right within thirty days from the date the assignee demands payment from him (Art. 1634, NCC).

Coverage: Articles 1458 to 1688

Section 2 of the Law defines the three types of transactions which are treated as “bulk sales” covered by the Law, as any sale, transfer, mortgage or assignment of: 1) A stock of goods, wares, merchandise, provision or materials not in the ordinary coursse of trade and the regular prosecution of the business of the seller, mortgagor, transferor, or assignor (“Extraordinary sale of goods”); 2) All, or substantially all, of the fixtures and equipment used in and about the business of the seller, mortgagor, transferor or assignor (“Extraordinary sale of fixtures and equipment”); and 3) All, or substantially all, of the business or trade theretofore conducted by the seller, mortgagor, transferor, or assignor; (“Sale of business enterprise”).37

EXAMPLE: The assignor filed a case against his debtor for a PN worth P1M. In need of a financial fix, he sold his right in litigation to Juan Dela Cruz for P700K. a. Is that a good stand? Yes. The PN may be sold at a lower price so that the assignee may earn from the transaction. b.

c.

Can he compel the assignee to receive the P700K? No. The debtor is still bound by his original obligation on the PN. The value of the PN is not affected by the assignment made by the assignor to the assignee. The PN must continue to be valued at P1M.

151.

How is this different from the 1st example (#148)? Disregarding the values and the circumstance that caused the sale, the 1st example is not different from this case.

150. What is the BULK SALES LAW? Is also known as Act. No. 3952, as amended by R.A. 111. a. What are the acts of the owner which are prohibited?

(V.2.7)

b.

Why is this prohibited? It is primarily intended to prevent a situation where merchants would defraud their creditors by hurriedly selling their businesses and vanishing into thin air, with the creditors left holding the bag, while the transferee comes under the protection of the doctrine of “buyer in good faith and for value.” Often, it would be difficult for the creditors to prove fraudulent connivance on the part of the buyer.38

c.

Why would it prejudice the other creditors; are they not all in the same boat? It is because a seller may sell his property to settle his debts against one debtor and leave the other unpaid. (?)

You said that the Bulk Sales Law is for the creditors. It is easy to understand in a sale, because the debtor will no longer have property to settle his obligations to the creditor. But what about in the case of mortgage? It also includes mortgage because the law is wary of loopholes by which a debtor may dispose of his property. In mortgage, ownership may be transferred to another when the property is foreclosed.

                                                                                                                Villanueva, p. 584 : The enumeration has been re-arranged from the order given in the Bulk Sales Law to show a hierarchical progression of the subject matter of “bulk sales.” 38 Villanueva, p. 583. 37

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b.

(recitation questions of Dean Jara)

In mortgage there is no transfer of ownership, isn’t it? Yes, initially there is no transfer of ownership. However, the mortgage may lead into a transfer of ownership. In a mortgage, the property is given merely as a guarantee, but when the debtor-mortgagor fails to perform his obligations to the mortgagee, the property may be attached and transfer of ownership may be made. Do you agree that the mortgage is also covered by the Bulk Sales Law? Yes, mortgage is mentioned as a transaction covered by Sec. 2 of the Bulk Sales Law.

Coverage: Articles 1458 to 1688

Lease may be defined as a consensual, bilateral, onerous and commutative contract by virtue of which one person binds himself to grant temporarily the use of a thing or to render some service to another who undertakes to ay some rent, compensation or price. (Sanchez Roman 736) 40 157.

If the owner of a business rents out his entire property, shall it be covered by the Bulk Sales Law? No. The Bulk Sales Law only covers sales, mortgage, transfer and assignment. Applying the statutory principle of casus omissus pro omisso habendus est: rent, as it was not included, must have been intentionally omitted.

Suppose he sells anything that he has right to, will it be (cover) anything (all his properties)? No. First, the items or property must be covered by the Bulk Sales Law; and, second, it must not fall within those not covered by the law. Even if the transaction falls within the definition of “bulk sale” the law would not be made to apply: (a) If the seller transferor, mortgagor or assignor produces and delivers a written waiver of the provisions of the Law from his creditors as shown by verified statements; and (b) Transactions effected by executors, administrators, receivers, assignees in insolvency, or public officers acting under legal process.39

a.

Is it not a transfer? No, it is not. There is only a grant for the temporary use of the thing.

b.

What if it is made for 20 or 30 years, is it not covered by the Bulk Sales Law? Yes, it is still not covered by the law since there is no transfer of ownership.

c.

Note hat a mortgage is included, so why can it not include a long-term lease? That is because in mortgage there can be possible transfer of ownership in case the mortgagor defaults in his obligation to pay the mortgagee. In the case of longterm lease there is only a right to use the thing as a usufruct but the ownership will remain with the lessor.

d.

What justification can you give for us to include a longterm lease? We may include long-term lease if such lease only purports to be a lease but is actually a rent-to-own agreement. (?)

152.

153.

From the very nature of the transactions it can prejudice the creditor, but why does it apply to mortgage? (JARA: You make your mind a little dirty, so that you can appreciate the law. ) It applies to mortgage because the law is wary of loopholes by which a person may dispose of his property if it were to be foreclosed. 154. So why does it prohibit a mortgage? JARA: Because they can end up in a mechanism that would lead to the sale of the property.

158.

155. What are the obligations of the seller? The seller has the obligation to transfer the ownership and to deliver a determinate thing (see Art. 1548, NCC). 156.

Give the definition of a LEASE. The concept of lease.

                                                                                                                39

Villanueva, p. 585-586.

(V.2.7)

If the lease entered into by the owner is a financial lease, shall it not also be covered by the Bulk Sales Law? a. What is a FINANCIAL LEASE? According to Section 3(d) of RA 8556, a Financial Leasing is “a mode of extending credit to a non-cancellable lease contract under which the lessor purchases or acquires, at the instance of a lessee, machinery, equipment, motor vehicles, appliances, business and office machines and

                                                                                                                40

Jurado, p. 1003.

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b.

(recitation questions of Dean Jara)

Coverage: Articles 1458 to 1688

other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

c.

Is it not considered a “sale on installment”? It is not. In a financial lease, the ownership of the thing will not be transferred to the owner after the end of the lease. There is neither an obligation nor an option to buy.

With regard to a surgeon and a patient, do you think that is a “principal-agent” or a “lessor-lessee” relationship? There is no “principal-agent” relationship, because the doctor does not represent the patient and he is not bound by the acts of the patient. There is, however, a “lessorlessee” relationship as a lease of service is availed of by the patient (lessee) from the doctor (lessor).

d.

In short, in a lawyer-client relationship, the lawyers is the agent and the client is the principal. So, if the lawyer makes a mistake, that would also be a mistake by the principal? Yes, the mistake will also be of the principal. The only exemption is when the lawyer is a fraud, impostor or not a duly recognized member of the bar (? - see Sabio Reviewer for Rules on Criminal Procedure).

There can be a lease of a thing and of a service. What is the difference? Respectively, based on Articles 1643 and 1644 of the Civil Code on Lease, the difference are as follows: In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid. In the lease of work or service, one of the parties binds himself to execute a piece of work or to render to the other some service for a price certain, but the relation of principal and agent does not exist between them.

The entire article provides that “In the lease of work or service, one of the parties binds himself to execute a piece of work or to render to the other some service for a price certain, but the relation of principal and agent does not exist between them.”

159.

a.

b.

(V.2.7)

So, does this (lease of a service) apply to a lawyer? It depends. For the lease of service to apply to a lawyer and his client, there must be no principal-agent relationship. Therefore, it cannot apply to all lawyers. For, example, a lawyer who is paid with a retainer to handle a case for the client is an agent of the client; however, if the lawyer is merely consulted by a client regarding a situation, he may not automatically be held as a agent since he is not representing the client. In the code, there is a qualifying phrase. How do you define a lease of service? Article 1644 makes an exception to the lease of service by the phrase “but principal and agent relation does not exist between them.”

160.

Let us say that a thief, with a stolen car, enters into a contract of lease with another. Will the contract of lease be valid? Why? No, the contract will be void. When all of the requisites prescribed by law for contracts are present, but the cause, object or purpose is contrary to law, morals, good customs or public policy, or are prohibited by law, or they are delcared by law to be void, such contract will then be void. (See Art. 1409, NCC). In this case, the stolen car which is the object of the contract, does not belong to the lessor. It would be contrary to good customs and morals to allow such contract to be valid. a.

What do you call it now? A void contract of lease. (?)

b.

Does the code require that the lessor is the owner or a valid possessor? There is no requirement expressly requiring the lessor to be the owner or valid possessor of the land. However, based on the provision on void or inexistent contracts, under Art. 1409, the contract may be void because the car was stolen – contrary to law, morals, good customs, public policy and are prohibited by law.

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Coverage: Articles 1458 to 1688

It depends on stipulation. Generally, consent is necessary for assignment. On the other hand, subletting a property may be done without consent of the lessor only if there is no express prohibition to the contrary (see Arts. 16491650).

161.

In another case, if a squatter puts up a shanty and rents out a space to a lessee, will there be a lease? No, there will not be a lease in the eyes of law. The lease is merely present in terms of agreement between the parties, but since the right to grant usufrutuary to the lessee is inexistent, the lessee shall not have a warranty against eviction from the property. (?)

162.

a.

How is this different from the first example when the only difference is the object – a car and a land? The car is a movable, but a land is immovable. Since lease is under the concept of sale, then the lease of movables is also covered by the protection of the law for the buyer in good faith who has leased the goods under the provision of Art. 1505. (?)

b.

In the case of the stolen car, will the lessor be liable to the lessee in case the owner becomes the possessor of the car? Yes, the lessor may still be liable to the lessee even if the contract is void. According to Art. 1412 (2), when only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise.

c.

What is a BREACH? Breach of a contract is when one of the parties, by his acts, omissions, and other factors, is unable to comply with what is incumbent upon him. (?)

d.

How can there be breach when there is no transfer of property? In a lease, for example, a breach may happen if the stipulated reason for the contract was so that a lessee may reside in the leased area. If the area later turns out to be uninhabitable, the lessor then breaches his obligation to make the necessary repairs in order to keep the place suitable for the use to which it has been devoted (see Art. 1654, NCC).

There is a contract of lease for a commercial property. a. May the lessee assign or sublet?

(V.2.7)

b.

So, generally, can he sublet or assign? Generally, the lessee can sublet but cannot assign.

163.

The lessee assigns his right to the bank, PNB, to secure a loan. Can he do such without the consent of the lessor? Generally, he may not make an assignment of the lease. Article 1649 provides that “the lessee cannot assign the lease without consent of the lessor, unless there is stipulation to the contrary.” 164.

There is a contract of lease. The code allows that the lessee may sublet the property, isn’t it? Yes. a. Say the 2-year period is still running. The principal lease is for 2 years, but the sublease is for 4 years. Is it valid? The contract is unenforceable since the lessee does not have the authority to allow the sublessee to lease the property beyond what is agreed between him (lessee) and the lessor. After the 2-year period prescribes, according to the contract between the lessee and lessor, he may not enforce the 4-year lease agreement. (?) b.

Is there a contractual relationship between the lessor and the sublessee? There is none, but there is an obligation between them, namely: Without prejudice to his obligation toward the sublessor, the sublessee is bound to the lessor for all acts which refer to the use and preservation of the thing leased in the manner stipulated between the lessor and the lessee (Art. 1651). 1) If there is none, then why do you say that the sublessee is bound to the lessor? Because just like the lessee, he is bound to preserve the use of the thing leased. 2) If the lessee is evicted in the property, shall the sublessee also be evicted? Yes, since the sublessee’s rights is only based on the rights of the lessee.

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3) You’re telling us that the lessee is evicted because of the sublessee? Yes, the lessee may be evicted because of the sublease since the sublessee is also bound to preserve the thing. If the sublessee fails to do so, and the lessor evicts the sublessee, the lessee may also be evicted because the sublessees breach would be credited as the lessee’s own. 165.

Does the law provide for the limit of the sublet? No, there is no provision limiting the lease. Can there be a sublease #3 and 4? Yes.

166.

Can the owner be a tenant of his own property? Is it legally feasible? Yes. a. Have you come across an article or an express prohibition for an owner to become a tenant of his own property? No. (?) b. Give an example. A building is leased by a lessee. The lessee turns the building into a mall and divides it into units for rent. The lessor may rent such unit from the lessee for a boutique or a restaurant.

167.

There is a lease on a piece of land for 2 years. Can the landlord, 2 days before the expiration of the lease, go to the court? It depends on his reason. If the landlord has legal grounds which may be used to disregard the period, he may avail of the court’s help. However, with respect to the prescription, the lessee still has right to occupy such property before the period agreed upon expires. Consequently, the landlord does not yet have a cause of action. (?)

168.

a.

Can the landlord after the expiration of such period go to court for an unlawful detainer? Yes.

b.

So if the lease expires today, may the landlord apply for an unlawful detainer? Yes.

c.

What better proof of expression from the landlord is there, to object to the occupancy, for the court?

The implied new lease will be how long?

Coverage: Articles 1458 to 1688

(V.2.7)

It depends on the property involved. In the lease of a piece of rural land, when its duration has not been fixed, is understood to have been for all the time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once, although two or more years have to elapse for the purpose (Art. 1682, NCC). In another case, if the period for the lease has not been fixed, it is understood to be from year to year, if the rent agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is to be paid daily. However, even though a monthly rent is paid, and no period for the lease has been set, the courts may fix a longer term for the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a longer period after the lessee has been in possession for over six months. In case of daily rent, the courts may also fix a longer period after the lessee has stayed in the place for over one month (Art. 1687, NCC). 169. What is the latin term for “implied new lease”? It is tacita redconduccion. 170.

What are the grounds for eviction? a. Under the Code (Art. 1673, NCC) The lessor may judicially eject the lessee for any of the following causes: (1) When the period agreed upon, or that which is fixed for the duration of leases under Articles 1682 and 1687, has expired; (2) Lack of payment of the price stipulated; (3) Violation of any of the conditions agreed upon in the contract; (4) When the lessee devotes the thing leased to any use or service not stipulated which causes the deterioration thereof; or if he does not observe the requirement in No. 2 of Article 1657, as regards the use thereof. The ejectment of tenants of agricultural lands is governed by special laws. b.

Under the Rental Law (Sec. 7, RA9341) To summarize, judicial ejectment shall be allowed on the following grounds: 1) Assignment of lease or subleasing of residential units in whole or in part, including the acceptance of boarders or bedspacers, without written consent of the owned/lessor. page

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Coverage: Articles 1458 to 1688

2)

3)

4)

5)

Arrears in payment of rent for a total of three months: Provided, That in the case of refusal by the lessor to accept payment of the rental agreed upon, the lessee may either deposit by way of consignation, the amount in court, or with the city or municipal treasurer, as the case may be, or in a bank in the name of and with, notice to the lessor, within one (1) month after the refusal of the lessor to accept payment. Legitimate need of owner/lessor to repossess his of her property for his or her own use or for the use of any immediate member of his or her family as a residential until. Need of the lessor to make necessary repairs of the leased premises which is the subject of an existing order of condemnation by appropriate authorities concerned in order to make the said premises safe and habitable. Expiration of the period of the lease contract.

December 31, 1987, monthly rentals of all residential units not exceeding P480 shall not be increased by the lessor by more than 10% in 1985, 20% in 1987, which increases shall be cumulative and compounded. (4) R.A. 6643 (Dec. 28, 1987) extends the effectivity of B.P. Blg 877 for another two (2) years, fixing the allowable maximum increase for the two-year period to not more than 20% in 1988 and 20% in 1989, which increases shall be cumulative and compounded. (5) R.A. No. 7644 (Dec. 28, 1992) extends the effectivity of B.P. Blg. 877 for five (5) years, fixing the allowable maximum increase for the five –year period from 1993 to 1997 at 20% yearly which increases shall be cumulative and compounded. (6) R.A. No. 8437 (Dec. 22, 1997) extends the effectivity of B.P. Blg. 877 for four (4) years, fixing the allowable maximum increase for the four-year period from 1998 to 2001 at 15% yearly, which increases shall cumulative and compounded. (7) R.A. No. 9161 (Dec. 22, 2001) provides that “beginning 01 January 2002 and for a durationof three (3) years thereafter ending on 31 December 2004, the monthly rentals of all residential units in the National Capital Region and other highly urbanized cities not exceeding P7,500.00 and the monthly rentals of all residential units in all other areas not exceeding P4,000.00 shall not be increased annually by the lessor, without prejudice to existing contracts, by more than 10%.41

171.

Is the provision on assignment (for lease) the same in the CC and in the Rental Law? Generally, yes, because both require consent. In the CC, it provides that the lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary (Art. 1649, NCC). In the Rental Law, the assignment of lease of residential units in whole or in part, including the acceptance of boarders or bedspacers, without the written consent of the owned/lessor, is what is prohibited. 172. Give a brief historical background of the Rental Law. A number of laws have been enacted freezing rentals for a certain period of time at their current level for the benefit of the lower income group. The common feature of these laws is the suspension of the application of paragraph (1) of Article 1673 of the Civil Code (except when the lease is for a definite period) during the period of their effectivity, to lease of a dwelling unit or of land on which another’s dwelling is located. (1) Presidential Decree No. 20 (October 12, 1972) which amended R.A. No. 659, prohibits the increase of the monthly rental agreed upon between the lessor and the lessee and the lessor and the lessee when said monthly rental does not exceed P300.00. (2) B.P. Blg. 25 (April 10, 1979) prohibits for a duration of five (5) years from its effectivity, the increase of monthly rentals of all residential units not exceeding P300.00, for any one (1) year period, by more than 10% of the monthly rentals existing at the time of approval of the Act. (3) B.P. Blg. 877 (June 6, 1985) provides that beginning July 1, 1985 and for a duration of two and half years thereafter ending

(V.2.7)

b. c. d. e.

At present, what properties are covered by the Rental Law? Covered by R.A. No. 9345 (Dec. 21, 2005) are Give the duties of the lessor and the lessee. Until when is the Rental Law? What happens after 2013?

173.

Are there no provisions on the New Rental Law that departs from the old? Under the New Rental Law, as amended by R.A. 9653 which was effective in 2009, the allowable increase in rent was to be reduced to 7% per year from the 10% annual increase set by R.A. 9341. This percentage of increase applies until 2013. Note that the law appears to be self-repealing or repealed ever 4 years. 174.

Under the code, who can those who cannot validly enter into a lease? Same as those prohibited by Articles 1490 and 1491 of the Civil Code, namely:

                                                                                                                41

De Leon, p. 679-680.

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(V.2.7)

Spouses, to each other; Guardians; Agents; Executors and administrators; Public officers and Employees; Justices, judges, prosecuting attorney, clerks…; and Others by law

175.

Under the code, there is a ground for eviction when there is necessary repairs. How is it under the Rental Law and the Code? Under the Rental Law, to warrant ejectment on the ground of need of the lessor to make necessary repairs of the leased premises which is the subject of an order of condemnation, the requisites are: (1) after repair, the lessee ejected shall have the first preference to lease the same promises; (2) the new rent shall be reasonably commensurate with the expenses incurred for the repair of said residential unit; and (3) if the residential until is condemned or completely demolished, the lease of the new building will no longer be subject to the aforementioned first-preference rule in this subsection.

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